VZCZCXRO8058
RR RUEHCN RUEHGH
DE RUEHGH #0411/01 2660913
ZNR UUUUU ZZH
R 220913Z SEP 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7184
INFO RUEHBJ/AMEMBASSY BEIJING 2138
RUEHCN/AMCONSUL CHENGDU 1422
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 1393
RUEHHK/AMCONSUL HONG KONG 1577
RUEHSH/AMCONSUL SHENYANG 1416
RUEHIN/AIT TAIPEI 1227
RUCPDOC/USDOC WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7771

UNCLAS SECTION 01 OF 02 SHANGHAI 000411 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EEB, AND INR/B 
STATE PASS FEDERAL RESERVE BOARDFOR JOHNSON/SCHINDLER; SAN FRANCISCO FRB FOR CURRAN/GLICK; NEW YORK FRB FOR CLARK/CRYSTAL/DAWSON 
STATE PASS CFTC FOR OIA/GORLICK 
CEA FOR BLOCK 
USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND OCEA/MCQUEEN 
TREASURY FOR AMB. HOLMER, WRIGHT AND TSMITH 
TREASURY FOR OASIA - DOHNER/HAARSAGER/CUSHMAN 
TREASURY FOR IMFP - SOBEL/MOGHTADER 
NSC FOR LOI 
USTR FOR STRATFORD, WINTER 
 
E.O. 12958: N/A 
TAGS: CH ECON EFIN EINV PGOV PREL
SUBJECT: SOME SHANGHAI BANKS NERVOUS ABOUT US TRANSACTIONS 
 
¶1.  (SBU) Summary.  Some Chinese banks are refusing to increase 
their exposure to U.S. bank debt since the Lehman failure, 
although there does not appear to be a broad government policy 
in effect, said several U.S. banks with operations in Shanghai 
contacted on September 22.  End summary. 
 
Some Evidence of Chinese Bankers' Skittishness 
 
¶2.  (SBU) High-level executives of Citigroup, JPMorgan, and 
Wachovia privately related to Econoff on September 22 that some 
Chinese banks are less willing to complete transactions with 
foreign banks -- especially U.S. banks, according to one contact 
-- and others are refusing deals.  One U.S. banker suggested 
that the central authorities may have given general guidelines 
to the money market desks of Chinese banks not to increase their 
holdings.  Another said that the Big Four Chinese banks 
(Industrial and Commercial Bank of China, China Construction 
Bank, Bank of China, and Agricultural Bank of China) are clearly 
reluctant to make interbank loans to U.S. financial 
institutions.  For instance, one interlocutor said that Chinese 
banks were avoiding making clearing payments through New York, 
that is, not using New York-based correspondence banks to route 
their transactions to third parties. 
 
¶3.  (SBU) Nonetheless, our interlocutors agreed that Chinese 
banks' hesitation did not appear to be the result of a blanket 
ban by policymakers in Beijing on business with U.S. banks.  One 
said that the decisionmaking appeared to be very 
"decentralized," with one desk of a Chinese bank continuing to 
trade normally, while another shuts down new deals.  Two 
interlocutors pointed to smaller Shanghai banks as most likely 
to avoid business with foreign banks, based on a generally more 
conservative approach. 
 
Marginal Impact on Day-to-Day Operations 
 
¶4.  (SBU) There is a small -- but measurable -- impact on the 
foreign banks' bottom lines.  This is especially true for those 
with a small local deposit base -- so-called "wholesale banks" 
-- because they are almost entirely dependent on the interbank 
market to fund daily operations, and the cost of borrowing is 
rising. 
 
¶5.  (SBU) One contact said that regional interest rates have 
been above historical averages for several weeks, but that this 
past week was exceptional even by those standards.  Rates in 
East Asia have been at a premium of 30-40 basis points (Note: 
One basis point is one-hundredth of a percent.  End note.) above 
LIBOR.  Last week, this surged to 300-400 basis points above 
LIBOR, before settling back down to 30-40 after the U.S. 
financial action package was announced on Friday, September 19. 
 
"This is the CBRC Calling . . . " 
 
¶5.  (SBU) The Shanghai branch of the China Banking Regulatory 
Commission (CBRC) on September 19 contacted foreign-invested 
banks for details on those banks' exposure to the Lehman 
Brothers bankruptcy and the Merrill Lynch merger.  CBRC has 
requested a report from each bank in two parts: 
 
-- Part one is to be a description of the impact of the 
Lehman/Merrill Lynch news on the parent bank, including such 
details as business transactions between the parent bank and the 
two former investment banks in terms of the money market, credit 
facilities, security investments, letter of credit guarantees, 
and derivatives.  Also, details of actions the parent bank plans 
to take. 
 
-- Part two is to be the impact on the Shanghai-based bank of 
the Lehman/Merrill Lynch news, including details regarding the 
money market, credit facilities, securities investment, letter 
of credit guarantees, derivatives, the Qualified Domestic 
 
SHANGHAI 00000411  002 OF 002 
 
 
Institutional Investor program, as well as plans the 
Shanghai-based bank intends to take. 
 
¶6.  (SBU) One bank took preemptive action last week, sending its 
head to arrange meetings with the CBRC and the People's Bank of 
China (PBOC) in Beijing.  The Chinese authorities seemed 
"nervous" about the international situation, and especially the 
impact on Chinese retail investors, our contact said, but were 
not at all concerned that Chinese domestic liquidity would 
become a problem.  Another contact said the Ministry of Finance 
and PBOC had contacted their bank three weeks earlier to inquire 
about that bank's involvement in third-party repo agreements. 
 
Comment 
 
¶7.  (SBU) These latest stories from Shanghai-based U.S.-invested 
banks may be the first signs of broader, longer-lasting doubts 
about the U.S. financial system, which could also impact efforts 
to further open the Chinese banking system to foreign 
participation.  So far, none of our interlocutors could point to 
any silver lining in the clouds over the international financial 
sector, such as Chinese plans to purchase U.S. financial 
companies at cut-rate valuations. 
CAMP